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Technology Alphabet beats Wall Street estimates, but spending worries investors

Alphabet Inc’s fourth-quarter revenue and profit beat Wall Street’s expectations on Monday but sharply higher spending, as it added data centres, cloud engineers and marketed its services heavily during the holidays, worried investors.

The company’s shares, which have risen almost 17 per cent over the past six weeks, fell 2.3 per cent to $1,114.60 in after-hours trading.

Partly because of the higher spending, Alphabet reported an operating margin of 21 per cent in the fourth quarter, down from 24 per cent a year ago.

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“Google saw a steep decline in operating margins,” said Richard Kramer, analyst at Arete Research “They have plenty of cash to invest, and $7-billion in capex is a huge spend.”

Alphabet Chief Financial Officer Ruth Porat said capital expenditures this year would “moderate quite significantly,” speaking to investors and analysts after results were announced.

The company has authorized a plan to buy back an additional $12.5-billion worth of its shares, Porat also said.

Facebook Inc’s better-then-expected fourth-quarter results last week had lifted expectations for Alphabet as they suggested that concerns about a global economic slowdown may be overblown.

Alphabet’s fourth quarter revenue rose 22 per cent from a year ago to $39.28-billion, compared to the average expectation of $38.93-billion among analysts tracked by Refinitiv. About 83 per cent of the revenue came from Google’s ad system, chiefly mobile search and YouTube, the company said on a call with analysts.

The company had $31.07-billion in total fourth-quarter costs and expenses, up 26 per cent from last year. Capital expenditures rose 64 per cent compared to last year, up to $7.08-billion.

Porat said increased operating costs stemmed from licensing content for YouTube, expanded data centre operations and Google’s hardware business.

A run-up in spending has reflected Google’s efforts to boost staffing on its cloud computing division, promote its consumer devices and YouTube subscription packages and acquire office buildings in Silicon Valley and New York.

Quarterly profit was $8.95-billion, or $12.77 per share, compared with a $3-billion loss a year ago. That compared to analyst estimates of $7.69-billion, or $10.87 per share.

The loss last year related to a one-time charge from new U.S. tax rules, while earnings since then have benefited from new rules about valuing Alphabet’s dozens of investments in external startups. Fourth-quarter earnings also benefited from a $1.3-billion unrealized gain related to a nonmarketable debt, Alphabet said.

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